Financial Management EXPLAINED by Business Explained v2

1
Licensed to Jerry Sam, [email protected], 11/26/2023

“Think ahead, don’t let day
to day operations drive “
out planning
Donald Rumsfeld
2
ALL RIGHTS RESERVED.
No one is permitted to reproduce or transmit any part of

this book through any means or form, be it electronic or
mechanical. No one also has the right to store the information
herein in a retrieval system, neither do they have the right to
photocopy, record copies, scan parts of this document, etc.,
without the proper written permission of the publisher or
author.
Copyright © Business Explained (2023)

www.business-explained.com
Disclaimer
All the information in this book is to be used for informational and educational purposes
only. The author will not, in any way, account for any results that stem from the use of the
contents herein. While conscious and creative attempts have been made to ensure that all
information provided herein is as accurate and useful as possible, the author is not legally
bound to be responsible for any damage caused by the accuracy as well as the use/
misuse of this information.

INTRODUCTION TO FINANCIAL MANAGEMENT 6
Defining Financial Management 6
Objectives of Financial Management 7
The Role of Finance in Business 9
FINANCIAL STATEMENT ANALYSIS 10
The Balance Sheet 10
The Income Statement 10
The Cash Flow Statement 11
Financial Ratios and Interpretation 11
Profitability Ratios 12
Liquidity Ratios 13
Efficiency Ratios 14
Leverage Ratios 15
Market Value Ratios 15
FINANCIAL STRATEGIES 16
Zero-Based Budgeting (ZBB) 16
Activity-Based Costing 17
Target Costing 18
Value-Based Management 19
Financial Modelling 19
Earnings Management 20
Financial Restructuring 20
Leverage Buyouts 21
Financial Synergy 22
Portfolio Management 22
Behavioral Finance 23
Sustainable Finance 23
Fintech Strategies 24
FINANCIAL PLANNING AND FORECASTING 25
The Financial Planning Process 25
Budgeting and Budgetary Control 27
Financial Forecasting Techniques 29
WORKING CAPITAL MANAGEMENT 31
Cash Management 31
Accounts Receivable Management 32
Inventory Management 33
CAPITAL BUDGETING 34
THE CAPITAL BUDGETING PROCESS 36
Time Value of Money 36
Capital Budgeting Techniques 37
Risk Analysis in Capital Budgeting 38
COST OF CAPITAL 40
Components of Cost of Capital 40
Weighted Average Cost of Capital (WACC) 42
Factors Affecting Cost 43
CAPITAL STRUCTURE 44
Concept of Capital Structure 44
Optimal Capital Structure 45
The Theories of Capital Structure 45
Financial Leverage and Leverage Ratios 47
Capital Structure Decision-Making 48

DIVIDEND POLICY 49
The Importance of Dividend Policy 49
Factors Affecting Dividend Policy 50
Theories of Dividend Policy 51
Dividend Policy Decision-Making 52
RISK MANAGEMENT 54
Types of Financial Risks 54
Risk Identification and Measurement 55
Risk Management Strategies 56
The Role of Derivatives in Risk Management 57
MERGERS AND ACQUISITIONS 59
Types of Mergers and Acquisitions 59
The M&A Process 60
Valuation in Mergers and Acquisitions 61
INTERNATIONAL FINANCIAL MANAGEMENT 63
Foreign Exchange Markets and Rates 63
International Financial Risks 64
International Financial Strategies 65
FINANCIAL MANAGEMENT CASE STUDIES 67
CONCLUSION 69

INTRODUCTION TO
FINANCIAL MANAGEMENT
DEFINING FINANCIAL MANAGEMENT

Financial management involves planning, managing,
regulating, and monitoring an organization’s finances to
meet its goals. It encompasses strategic financial resource
allocation, risk management, and project or asset investment.
Each firm needs good financial management to operate
efficiently and accomplish its goals.
Financial management is like being the captain of a ship. It

involves steering the organization toward its financial goals
while managing resources and risks along the way. As the
financial manager, you must create a financial strategy,
distribute resources, and monitor the company’s financial
performance.
Financial managers must create budgets and control

spending to keep the business within its means, just like a
ship’s captain must budget for fuel, food, and other supplies.
They must also monitor the financial markets and manage
risks to avoid unforeseen setbacks.
Financial managers must manage risk by diversifying their

investments and creating backup plans, much as a captain
must sail through hazardous waters and avoid possible
dangers. They must examine financial data to see patterns
and decide on investments and other financial plans.
Financial managers must allocate resources to initiatives that
will produce the highest return on investment, similar to how
the captain must make strategic decisions about where to sail
and what cargo to carry.
6
Financial management involves planning, managing
resources, monitoring performance, managing risk, and
making strategic investment decisions to help a company
succeed. As a ship captain, the finance manager must
navigate changing waters, make tough decisions, and guide
the business to its goal.
OBJECTIVES OF FINANCIAL MANAGEMENT

Financial management aims to maximize earnings or
shareholder value, maximize efficiency, and achieve strategic
goals. Financial management ensures that a firm has the
resources it needs to function and expand.
1. Maximizing profits: Maximizing profits or shareholder

value is one of financial management’s primary goals.
Financial managers must invest in projects with the best
return on investment.
2. Managing cash flow: Financial management relies on

cash flow management, which tracks a company’s
incoming and outgoing finances. Financial managers
must ensure the firm has adequate cash to meet its
obligations.
7
3. Managing risk: Risk management is a component
of financial management as well. This entails recognizing
possible hazards and creating mitigation solutions.
Financial managers must evaluate market volatility,
credit risk, operational risk, and other potential hazards
to guarantee the organization’s financial stability.
4. Achieving strategic goals: Achieving an organization’s

strategic objectives, such as entering new markets,
launching cutting-edge goods, or purchasing rival
businesses, is another aspect of financial management.
Financial planners must create budgets and distribute
funds to initiatives that will aid the firm in achieving its
strategic goals.
5. Ensuring compliance: Finally, financial management

includes legal and regulatory compliance. Financial
managers must comply with accounting, tax, and other
requirements that influence the company’s finances.
An organization’s financial resources must be managed

efficiently to optimize revenues, shareholder value, risk
management, strategic goals, and legal and regulatory
compliance. By attaining these goals, financial managers may
assist their firms in long-term financial success.
8
THE ROLE OF FINANCE IN BUSINESS
By supplying the tools and plans a company needs to
function and expand, finance plays a crucial part in business.
Finance assists businesses in budget management, strategic
investment selection, and goal achievement.
The efficient management of financial resources is one

of finance’s primary responsibilities in business. Financial
managers must create budgets, track cash flows, and control
spending to ensure the company stays within its financial
limits. This directs financial resources to investments and
initiatives with the lowest risk and highest rate of return.
Decisions about strategic investments must also be made
by finance. Financial managers must evaluate the possible
risks and returns of various investment alternatives while also
analyzing market trends. Choosing whether to invest in new
ventures, stocks, bonds, or other financial instruments falls
under this category.
The provision of funding for an organization’s operations and

expansion is another crucial function of finance in business.
Getting loans, issuing bonds, and generating money through
equity offers all fall under this category. To guarantee that the
company has the financial resources it needs to function and
expand, finance must also manage the organization’s debt
and equity funding.
Ultimately, financing is essential to the organization’s

success in achieving its objectives. Financial managers must
collaborate closely with other departments to create financial
strategies that complement the organizational strategic goals.
This includes creating financial predictions and budgets,
keeping track of financial performance, and selecting the best
way to allocate resources.
9
FINANCIAL STATEMENT
ANALYSIS
Financial statements reveal a company’s performance,

profitability, liquidity, and solvency. Financial statements
are the best way to assess a company’s finances. Financial
statement analysis utilizes numerous methods:
THE BALANCE SHEET

A balance sheet is a sketch of the assets, liabilities, and equity
of a corporation. It lists firm assets, liabilities, and equity.
Assets equal liabilities plus equity to create the balance sheet.
Creditors, investors, and other stakeholders evaluate a
company’s financial health using the balance sheet. It
assesses a company’s solvency, leverage, and liquidity.
Balance sheets list a company’s assets and liabilities. After
meeting commitments, a company’s equity remains.
Balance sheets are one of three financial statements required

at the conclusion of each accounting period. Income and
cash flow statements are others. (Fernando, 2022)
THE INCOME STATEMENT

An income statement summarizes a company’s finances over
a quarter or year. It calculates and displays the company’s
net income or loss. Investors, lenders, and others use income
statements to assess a company’s performance. It calculates
net, operational, and gross profit margins.
The cost of products sold is deducted from the company’s

revenue to determine the gross profit. After subtracting
operational expenses, operating profit or loss is computed.
Taxes and interest are deducted to determine net income or
loss. (Chen, 2023)
10
THE CASH FLOW STATEMENT
The cash inflows, outflows, and cash equivalents from
operations, investments, and financing are shown on this
financial statement. It offers an entire picture of a business’s
finances and cash flow.
Investors, lenders, and anyone interested in a company’s

liquidity and cash flow creation might use the cash flow
statement. Also, it assesses a firm’s development potential.
Operational, investment, and finance activities comprise the

cash flow statement. The operational activities section shows
the company’s key operations’ cash flows. The investing
activities unit shows cash flows from the company’s property,
plant, and equipment investments. Financing Operations
displays the cash flows from the company’s financing
operations, such as loan issue and repayment and the share
issuance and buyback.
FINANCIAL RATIOS AND INTERPRETATION

Financial ratios reveal a company’s financial health and
success. They support analysts’ and investors’ decision-
making by providing information on a company’s financial
stability, profitability, operational effectiveness, and risk.
Common financial ratios include liquidity, profit,
effectiveness, and solvency. Profitability ratios assess a
company’s capacity to produce a profit, whereas liquidity
ratios evaluate its ability to satisfy short-term commitments.
Solvency ratios measure a company’s ability to meet long-
term obligations, whereas efficiency ratios measure its
resource utilization.
Financial ratios must be interpreted by understanding a

company’s industry, competitors, and financial statements.
Some ratios apply only to certain industries. But, if a ratio isn’t
compared to other organizations in the same industry or over
time, it may not be a reliable indicator of future achievement.
11
PROFITABILITY RATIOS
Financial indicators, called profitability ratios, are used to
assess an organization’s likelihood of making a profit. To
arrive at these ratios, profits are compared to other financial
indicators (such as sales, assets, and shareholders’ equity).
https://www.fromthegenesis.com/profitability-ratios-fundamental-analysis/
Operating profit margin, return on assets, return on equity,

and return on investment measure a company’s profitability.
These metrics demonstrate the company’s profitability and
ability to maximize resources.
The gross profit margin is the amount by which sales are

in excess of the cost of goods sold, whereas the net profit
margin is the amount remaining after expenses have been
deducted.
Profitability indicators can inform investors and analysts

about a firm’s financial health. Comparing ratios to industry
standards and taking into account market developments and
competition may give a complete picture of a company’s
financial health.
12
LIQUIDITY RATIOS
Liquidity ratios measure a company’s ability to satisfy short-
term obligations by converting assets into cash to pay debts.
These ratios demonstrate current assets may cover how
quickly and readily current obligations.
https://finallylearn.com/liquidity-ratios/
The current ratio and the quick ratio are the most often used
measures of liquidity. Assets are divided by liabilities to arrive
at the current ratio. Inventory and other current assets that
would be difficult to change into cash are not included in
the quick ratio, also known as the acid-test ratio, which is a
stricter metric.
The capacity of a business to satisfy its commitments using

just its cash on hand and operating cash flows is gauged by
other liquidity ratios, including the cash and operational cash
flow ratios.
Indicators of a company’s financial health and capacity to

endure short-term financial hardship include liquidity ratios.
Compare these ratios to industry norms and consider market
developments and competition to gain a broader view of a
company’s finances.
13
EFFICIENCY RATIOS
Efficiency ratios are a type of financial metric used to assess
the efficacy of a company’s revenue generation and asset
management processes. These ratios provide insight into a
company’s operational efficiency and effectiveness in utilizing
its assets to generate profits.
https://corporatefinanceinstitute.com/resources/accounting/efficiency-ratios/
Common efficiency ratios include inventory turnover,

accounts receivable turnover, and accounts payable turnover.
Accounts receivable turnover measures how rapidly a
business receives payments from its clients, while inventory
turnover measures how fast a business sells and replaces its
inventory. The speed with which a corporation pays its bills
demonstrates the accounts payable turnover.
Other efficiency ratios include asset turnover and fixed asset

turnover, which assess the company’s capacity to produce
income from its assets and fixed assets.
Investors and analysts use efficiency ratios to assess a

company’s operational efficiency and effectiveness. Yet, it’s
necessary to compare the ratios to industry standards and
examine other aspects, such as market developments and
competition, to better comprehend a company’s financial
status.
14
LEVERAGE RATIOS
Financial measurements called leverage ratios are used to
evaluate a company’s financial risk and the volume of debt
financing it employs. These ratios shed light on a company’s
capacity for repaying its obligations and the degree of capital
structure risk.
https://www.educba.com/leverage-ratio-formula/
The most common leverage ratios are debt-to-equity and

debt-to-assets. The debt-to-assets ratio compares the firm’s
debt to its assets, while the debt-to-equity ratio does the
opposite.
Other leverage ratios include the interest coverage ratio,

which measures a company’s ability to use EBIT to pay its
interest charges, and the fixed charge coverage ratio, which
measures its ability to meet its fixed financial commitments.
Using leverage ratios, investors and analysts can assess a
company’s financial health and risk. Compare these ratios to
industry norms, market trends, and competition to get a full
financial picture of a firm.
MARKET VALUE RATIOS

Financial measurements, called market value ratios, measure
a firm’s valuation relative to its market price. These statistics
reveals investors’ views of a company’s growth and future.
P/E and P/B ratios dominate market valuation. P/E and P/B
ratios relate a firm’s stock market price to its earnings per
share and book value, respectively.
Market value ratios include dividend yield and earnings

per share (EPS) growth. The former measures a company’s
dividend payout, and the latter measures its profit growth.
Analysts and investors use market value ratios to evaluate a
company’s finances. Compare these ratios to industry norms,
market trends, and competition to assess a company’s value.
(Elmerraji, 2022)
15
FINANCIAL STRATEGIES
Companies’ financial strategies are their long-term and short-

term plans to manage their financial resources to meet their
goals. A company’s financial strategy should increase profits
and reduce losses as much as possible. (Kenton, 2022b)
These are some examples of common financial strategies:
ZERO-BASED BUDGETING (ZBB)

ZBB is a technique of budgeting in which all expenditures,
regardless of whether or not they were included in the prior
budget, must be justified for each new planning period.
Instead of making little adjustments to the previous year’s
budget, managers must create an entirely new budget every
year that takes into account the actual business expenses.
Costs are decreased, productivity is increased, and

responsibility is heightened all through the employment of
ZBB. ZBB aids in reducing expenses by requiring managers
to provide justifications for all expenditures. It also leads
to more precise budgeting since managers must examine
costs carefully to make sure they are justified and productive.
(Kagan, 2022)
16
ACTIVITY-BASED COSTING
An activity-based costing (ABC) method uses resource
consumption data to give monetary values to discrete tasks.
As opposed to traditional costing approaches, which allocate
costs based on volume-based measurements like direct
worker hours or machine hours, activity-based costing (ABC)
provides a more precise manner of cost allocation.
https://courses.lumenlearning.com/wm-accountingformanagers/chapter/using-activity-based-
absorption-costing/
ABC works well in service and high-tech manufacturing,

where overhead expenses often account for a
disproportionate share of total production costs. When
expenditures are allocated to specific activities, the true cost
of a product or service can be better understood with the
help of ABC.
By drawing attention to processes or procedures that use

a disproportionate amount of a company’s resources, ABC
can also reveal opportunities to cut expenditures. It can also
help managers make better pricing and resource allocation
decisions by shedding light on the profitability of individual
products or services.
17
TARGET COSTING
Setting a goal cost and then developing a product or service
around that cost is a cost management method known as
“target costing.” Rather than reacting to high costs after
production, this method of cost management is proactive
since it entails engineering costs out of a product or service
beforehand.
https://corporatefinanceinstitute.com/resources/accounting/target-costing/
In highly competitive markets, target costing helps

businesses maintain a profitable presence while still meeting
customer expectations for the price. It also encourages
collaboration between different departments, as design,
engineering, and production teams work together to reduce
costs and meet target cost goals.
Market research is the first step in target costing since it

reveals what customers want and at what price point, cost
analysis reveals how much something costs, and value
engineering finds ways to cut costs without sacrificing
quality. (Trinidad, 2022)
18
VALUE-BASED MANAGEMENT
Value-based management creates long-term benefits for
shareholders, workers, consumers, and suppliers (VBM). A
company’s strategy, objectives, and decision-making must
align to create long-term value.
VBM’s valuation model emphasizes value generation for

all stakeholders, not just shareholders. In addition to a
company’s financial performance, intangible assets like
brand equity and customer loyalty should be measured and
managed.
Key components of value-based management (VBM) include

establishing measurable objectives, rewarding employees
based on their contribution to long-term value, and utilizing a
balanced scorecard to track and report results.
FINANCIAL MODELLING
Financial modeling is a quantitative representation of a
company’s finances. Projecting economic outcomes like
revenue, costs, profits, and cash flow entails looking back at
previous performance and making fair predictions about the
future.
Financial modeling helps businesses make educated

decisions, evaluate options, and prepare for the future. It’s
widespread in corporate finance, investment banking, and
banking.
A financial model might be as simple as a spreadsheet or

as complicated as one using machine learning and other
advanced statistical methods. They help with hypothesis
testing, sensitivity analysis, and weighing the pros and cons
of various options.
19
EARNINGS MANAGEMENT
When a company’s financial statements are manipulated
to reach or surpass earnings projections, it engages in
earnings management. This may be done to boost the stock
price, satisfy creditors, or appease other stakeholders. It
entails manipulating a company’s financial statements using
accounting practices like revenue recognition, expense
deferral, and asset valuation.
Some methods of boosting profits are perfectly legitimate,

while others could be considered fraud. Earnings
manipulation, such as the early recognition of revenue or the
deferral of expenses, can be a kind of financial statement
fraud.
Long-term, companies may suffer from earnings

management if it lowers investor trust, which can result in
lower stock prices or higher regulatory scrutiny. As a result,
businesses should adhere to honest and open methods of
disclosing their financial data.
FINANCIAL RESTRUCTURING
A company’s financial performance, liquidity, and solvency
can all be enhanced through a process known as financial
restructuring. Capital structure changes including issuing
additional debt or stock, repurchasing shares, or restructuring
existing debt, could be necessary.
Selling off assets, spinning off business sections, or reducing

operating expenses are all examples of financial restructuring
strategies. Financial reformation improves the company’s
long-term competitiveness, stability, and profitability.
Reorganizing a company’s finances involves a complete
financial analysis and plan. Financial advisors, investment
bankers, and other experts may be needed to make
necessary revisions.
20
LEVERAGE BUYOUTS
Leveraged buyouts (LBOs) employ debt to acquire
businesses. In a leveraged buyout (LBO), the acquiring firm
uses the target company’s assets as collateral to get loan
financing and repays the debt from its cash flows.
Private equity firms frequently employ LBOs to acquire

companies and “take them private.” By purchasing
undervalued businesses, enhancing their operations and
financial performance, and then selling them for a profit,
private equity firms can produce returns for their investors
through leveraged buyouts (LBOs).
https://www.educba.com/leveraged-buyout-lbo/
The target firm and its stakeholders may benefit or suffer

from an LBO. While an LBO may not be the best option for
every business, it does provide some advantages. Yet, an
LBO’s heavy reliance on debt might put a company in greater
danger of failing financially.
21
FINANCIAL SYNERGY
Increased financial performance, efficiency, and profitability
are examples of financial synergy, which occurs when two or
more organizations merge. Financial synergy occurs when the
amalgamated company’s sales growth, profitability, and cash
flow surpass the sum of its distinct metrics.
There are many ways to generate financial synergy, including

cutting expenses, boosting market share, diversifying
revenue streams, and entering new markets. Increased
operational savings, stronger bargaining positions with
suppliers and customers, and lower financing costs are all
possible outcomes of financial synergy.
Companies engage in mergers and acquisitions (M&A)

to increase their financial performance and competitive
advantage by combining their operations and assets. In order
to reap the benefits, however, attaining financial synergy
requires rigorous strategy and execution.
PORTFOLIO MANAGEMENT
Portfolio management helps investors achieve their
financial goals by properly maintaining a diverse investment
portfolio. Picking investments, monitoring them, and making
modifications to account for market swings and individual
holdings’ performance is portfolio management.
Portfolio management’s ends might mean different things

for different investors based on their circumstances, comfort
levels with risk, and personal investment preferences.
Investors may prioritize capital preservation or income over
profit maximization.
Portfolio managers often diversify among asset types,

including stocks, fixed income, and real estate. It also entails
closely monitoring and adjusting the portfolio as needed to
ensure maximum success.
Risk analysis, performance monitoring, and asset allocation

strategies are only a few of the analytical tools and approach
professional portfolio managers use.
22
BEHAVIORAL FINANCE
Psychologists and economists work together in behavioral
finance to understand how people make financial decisions. It
recognizes that financial decisions are not always rational or
well-informed and seeks to identify psychological biases and
heuristics that affect them. Overconfidence, loss aversion,
and swarming behavior are studied in behavioral finance.
Emotions and social traditions also affect financial decisions.
Behavioral finance suggests that people may not always act in
their best financial interests, which has major implications for
investors and financial experts. If they understand cognitive
and emotional factors that affect decision-making, investors
and financial advisors may assist their customers in avoiding
frequent mistakes and making better financial decisions.
SUSTAINABLE FINANCE
When environmental, social, and governance (ESG) factors
are taken into account in the financial sector, this is known
as sustainable finance. Sustainable finance encourages
investments in activities that have a net beneficial effect
on the environment and society. The goal is to facilitate the
global economy’s shift toward sustainability and resilience.
Sustainable investing, green bonds, impact investing, and

environmental, social, and governance (ESG) integration
are all components of sustainable finance. Investment
opportunities that meet ESG criteria are sought out, and the
social and environmental effect of those opportunities is
measured and reported.
In recent years, the risks and opportunities connected with

climate change and other sustainability challenges have made
sustainable finance increasingly significant among investors
and financial institutions. Governments and international
organizations are actively promoting sustainable finance
through efforts like the U.N.’s Guidelines for Responsible
Investing and the E.U.’s Sustainable Finance Action Plan.
23
FINTECH STRATEGIES
The financial technology industry employs many strategies in
order to realize its objectives. Financial service enhancement,
cost reduction, and customer experience enhancement are
common goals of these technologically-driven solutions.
Platform-based models, big data/AI, open banking,
partnerships/collaborations, and regulatory compliance
are all prevalent fintech strategies. Financial technology
firms can provide customers with access to a variety of
financial services via digital platforms thanks to platform-
based business models. Financial services and decisions are
improved with the use of big data and A.I. With application
programming interfaces (APIs) for open banking; fintech
companies can gain access to client data held by traditional
financial institutions. With strategic alliances, fintech firms
might gain entry to previously inaccessible sectors or cutting-
edge technologies. Fintech organizations frequently employ
technology solutions to ensure regulatory compliance without
compromising on innovation or agility. (Kagan, 2022b)
24
FINANCIAL PLANNING
AND FORECASTING
Financial planning and forecasting assess future financial

performance using historical data, present trends, and market
circumstances. Financial planning involves creating a detailed
plan to allocate a company’s resources to meet its goals,
whereas financial forecasting uses historical data to anticipate
the future. (What Is Financial Forecasting + How to Do It [7
Steps], n.d.)
Careful financial planning and forecasting allow a firm to pay

bills, and salaries and invest in development. This technique
helps businesses anticipate and respond to dangers and
opportunities, manage money, and adjust to changing market
conditions. Financial planning and forecasting methods
include:
THE FINANCIAL PLANNING PROCESS

Financial planning is a method of managing finances in
stages. Reviewing the current financial situation, identifying
specific financial goals, developing a plan to reach those
goals, putting the plan into action, keeping track of results,
and making adjustments as necessary make up the process.
1. Assessing the current financial situation: Evaluating

the present financial condition is the first stage in the
financial planning process. This entails examining
earnings, costs, assets, and liabilities. Knowing your
present financial condition is crucial since it provides a
starting point for developing a financial strategy.
25
2. Setting financial goals: Prioritizing and identifying
precise financial goals is the next stage. These might
include supporting a child’s education, purchasing a
property, paying off debt, or investing for retirement.
3. Developing a financial plan: After the formulation

of the financial objectives, a strategy for achieving
those objectives is created. Timelines, precise activities,
and the resources required to complete the plan should
all be included. A budget, investing tactics, debt
reduction initiatives, and insurance plans could all be part
of the strategy.
4. Implementing the plan: This involves taking the

necessary actions to put the financial plan into action.
This may include setting up a budget, opening
investment accounts, and making changes to insurance
policies.
5. Monitoring progress: The financial plan must be

regularly monitored to ensure that it is still appropriate
and effective. This involves tracking progress against
financial goals and making adjustments as necessary.
6. Adjusting the plan: The financial plan should be updated

regularly to reflect changes in circumstances, goals, or
financial markets. Changes to the spending plan,
investment philosophy, or debt-reduction strategy are
examples of adjustments.
Financial planning may help individuals and organizations

save money, get peace of mind, and feel more financially
secure. It’s something that has to be kept up with throughout
time. Financial planning can protect individuals and
organizations.
26
BUDGETING AND BUDGETARY CONTROL
Budgeting and budgetary control help organizations plan,
monitor, and regulate their finances. Budgets forecast annual
revenue and spending. Budgetary control monitors and
adjusts actual outcomes versus planned amounts to meet
financial goals.
The budgeting process involves several steps:
1. Setting goals and objectives: The first stage in the

budgeting process is establishing specific financial goals
and objectives for the firm.
2. Creating a budget committee: The committee is

responsible for developing the budget and ensuring it
adheres to the organization’s objectives.
3. Estimating income and expenses: The organization’s

projected earnings and costs are estimated in the next
phase for the future time frame. Analyzing market
trends and historical financial accounts and estimating
future revenues and costs are all part of this process.
27
4. Developing the budget: The budget committee creates
a thorough budget with specific line items for all revenue
and spending based on the anticipated income and costs.
5. Obtaining approval: Once the budget is developed, it is
submitted to the appropriate stakeholders for approval.
Budgetary control involves the following steps:
1. Monitoring performance: Actual performance is

compared to the budgeted amounts to determine if the
organization is meeting its financial goals.
2. Identifying variances: Variances occur when actual

performance deviates from the budgeted amounts.
These variances must be identified, analyzed, and
addressed.
3. Taking corrective action: Corrective action is

conducted based on examining the deviations to
ensure the business continues on track to meet its
financial objectives.
Planning and budgetary management are vital for financial

success. Organizations may allocate resources and take
remedial action by creating clear financial objectives and
assessing performance against them. (Budgeting and
Business Planning, n.d.)
28
FINANCIAL FORECASTING TECHNIQUES
Financial management requires forecasting, which uses past
and present data to estimate future financial outcomes.
Financial forecasting helps businesses plan, budget, and
invest by predicting future financial performance.8
1. Trend Analysis: In order to spot trends in financial

performance, such as sales income, costs, and profits,
this approach requires studying historical data. Trend
analysis may be used to find trends and forecast
performance going forward.
2. Regression Analysis: In order to forecast future

results, this approach entails examining the relationship
between two or more factors, such as sales and
advertising costs. Determine the effects of various
variables on financial performance using regression
analysis.
3. Time-Series Analysis: With the use of historical data

analysis, patterns and trends across time may be found.
Time-series analysis uses previous patterns and trends
to forecast financial performance in the future.
4. Scenario Analysis: This method creates many scenarios

or potential outcomes based on various predictions
about the future. Scenario analysis can help
organizations plan for different possible outcomes and
adjust their strategies accordingly.
29
5. Monte Carlo Simulation: This technique involves using
computer modeling to simulate different possible outcomes
based on different variables and assumptions. Monte Carlo
simulation can help organizations make informed decisions
by providing a range of possible outcomes and their
probabilities.
Effective financial forecasting can help organizations

plan and make enlightened decisions about resource
allocation, budgeting, and investment. Choosing the
appropriate forecasting technique is important based on the
organization’s nature and available data. By using different
forecasting techniques, organizations can gain insights into
different aspects of financial performance and make more
accurate predictions about the future. (Tuovila, 2022)
30
WORKING CAPITAL
MANAGEMENT
Working capital management is the process by which a

business makes sure it has enough cash on hand to pay its
short-term bills when they come due. Managing working
capital means striking a stable equilibrium between spending
and earning. Successful management of a company’s working
capital can increase profits by decreasing expenses and
increasing cash flow. (Tuovila, 2023)
CASH MANAGEMENT
In order to pay its financial responsibilities and get the
highest possible return on any surplus cash, a corporation
must practice effective cash management. Good cash
management involves forecasting cash flows, setting cash
balances, and managing cash inflows and outflows.
Cash management prevents a firm from running out of
money or having too much to pay its bills, workers, and
vendors on schedule. Companies employ cash management
strategies to get there, including cash forecasting, cash
budgeting, and cash flow analysis.
Cash management also involves managing working capital,

which includes managing accounts receivable, accounts
payable, and inventory. Cash flow and liquidity can be
enhanced by focusing on these aspects of working capital.
One component of good cash management is putting any
surplus funds into yielding short-term investments like money
market funds or commercial paper. Short-term investments
include some degree of risk, so businesses need to strike a
balance between the demand for returns and the requirement
for liquidity and safety.
31
Managing cash flows, maximizing working capital, and
investing surplus cash to increase liquidity and financial
performance are all aspects of cash management. An
organization’s ability to satisfy its financial obligations,
prevent cash shortages, and maximize returns on excess cash
is directly tied to how well it manages its cash flow.
ACCOUNTS RECEIVABLE MANAGEMENT

Accounts receivable management ensures that clients’
invoices and payments are collected quickly and efficiently.
Accounts receivable management aims to maximize cash flow
by reducing the period between supply and payment.
Credit policy creation, invoicing and billing, collection and
follow-up, and cash application are essential to accounts
receivable management. These activities help ensure that a
company’s accounts receivable are managed to maximize
cash flow while minimizing bad debts and other credit risks.
Credit policy development involves establishing guidelines for
extending credit to customers, including credit terms, credit
limits, and credit evaluation criteria. This helps to ensure that
credit is extended only to customers who are likely to pay on
time and in full.
Invoicing and billing include creating accurate and timely

invoices and billing statements and sending them to clients
quickly. This reminds clients to pay their bills on time.
Collection and follow-up involve tracking outstanding
balances and following up with customers to remind them
of their payment obligations. This helps to ensure that
customers pay on time and in full and that any overdue
balances are addressed promptly.
Customer payments must be recorded and applied to the

right customer account and invoice. This maintains correct
customer accounts.
Accounts receivable management is crucial for cash flow and

credit risk reduction. Creating and implementing efficient
credit policies, invoicing, and billing processes, collection
and follow-up tactics, and cash application procedures can
enhance a company’s cash flow and financial performance.
32
INVENTORY MANAGEMENT
The term “inventory management” is used to describe the
method by which a business keeps tabs on and regulates
its stock. Companies need to retain the correct amount of
inventory to maximize earnings and prevent losses from
stockouts and shortages.
Proper inventory management is essential to avoid

overstocking or understocking and satisfy client demand.
Businesses accomplish this goal through the use of inventory
management strategies, including just-in-time (JIT) stock and
economic order quantity (EOQ), which help establish optimal
ordering schedules and stock levels.
Instead of keeping a significant stock of products in hand,

businesses that use just-in-time (JIT) inventory management
order things as they are needed to fulfill customer orders.
By taking this action, you can save money on storage and
handling fees incurred when stock is held in excess.
Companies can use EOQ to calculate the ideal order

quantity by factoring in the cost of stocking and the cost of
reordering. The goal is to reduce ordering and holding costs,
which add up to the overall cost of inventory.
Profitability, cash flow, and satisfied customers can all be

significantly increased with better inventory management.
Having the correct products at hand to meet consumer
requests and minimizing inventory expenses can be achieved
by keeping an optimal inventory level.
33
CAPITAL BUDGETING
Capital budgeting evaluates and selects long-term investment

projects with a long-term return on investment. Capital
budgeting helps companies choose the best investments
while reducing risk. (Team, 2022)
There are several steps involved in the capital budgeting

process:
1. Identify potential investment opportunities:

Investments that improve long-term growth and
profitability are sought during capital planning.
Investment opportunities include purchasing new
assets, producing new goods or services, expanding
into new markets, and replacing or improving current
assets.
2. Estimate cash flows: Estimating cash flows is the next

step after identifying prospective investment
possibilities. The investment’s lifetime earnings, costs,
and capital expenditures are forecasted. Net cash flow
is then computed by subtracting predicted cash inflows
from cash outflows.
3. Assess risk: Informed investing decisions need risk

assessment of each investment opportunity. Risk
assessment entails identifying risks, including market
volatility, regulatory changes, and technical
obsolescence, and assessing their likelihood and impact
on the investment.
34
4. Evaluate alternatives: The next step is to evaluate
various investment possibilities and choose the most
advantageous and useful one. Investment choices
include mutually exclusive projects, where only one
investment opportunity may be selected, and
independent projects, where numerous investment
possibilities may be selected.
5. Apply capital budgeting techniques: On the basis of

their anticipated cash flows, risks, and returns,
investment possibilities are assessed and compared
using capital budgeting methodologies. Common
capital planning approaches include the Net Present
Value (NPV), Internal Rate of Return (IRR), and Payback
Period.
6. Make the investment decision: Making an investment

decision comes after assessing and contrasting several
investment options. The organization’s strategic goals
and budgetary limits will all be taken into consideration,
along with the projected return on investment, amount
of risk, and other factors.
7. Monitor and review: It is crucial to monitor and

evaluate the investment’s performance after it has been
made to make sure that it generates the anticipated
cash flows and returns. This entails periodically going
over financial records and assessing how an investment
has affected the organization’s overall financial
performance.
Capital planning is essential for businesses wanting to

optimize their long-term development and profitability.
Organizations may make well-informed investment choices
that will provide a favorable return on investment over time
by carefully examining investment possibilities and utilizing
capital budgeting strategies to estimate risks and rewards.
35
THE CAPITAL BUDGETING
PROCESS
Businesses utilize a multi-step process called capital

budgeting to assess possible investments in long-term
projects or capital assets. This method helps firms determine
whether to commit financial resources to a venture or
acquisition that has the potential to provide long-term gains
or cash flows. (Pinkasovitch, 2022)
TIME VALUE OF MONEY

This is a fundamental concept in finance that describes the
change in purchasing power of one currency unit over time.
A dollar in today’s market is worth more than the same dollar
acquired through interest or investment returns in the future,
and this concept is founded on this time value of money
principle.
The time value of money is important for making financial

decisions like investments, expenditures, and loan
repayments. It helps people and organizations choose
where and how to invest their money to reach their financial
objectives.
Financial formulae like the present value formula and the

future value formula may estimate future money values.
The present value formula calculates how much money will
be received in the future, whereas the future value formula
evaluates how much money would be worth if invested today.
The temporal value of money also considers inflation, risk,
and opportunity cost.
36
Investment returns are subject to risk variables like shifting
interest rates as well as factors like inflation, which over time,
reduces buying power. The amount of money misused as a
result of avoiding alternative, more lucrative investments is
known as the opportunity cost.
Financial decisions depend on knowing how to determine

the present and future worth of money or investments. It
helps predict investment returns and interest needed to reach
financial objectives.
Taking into consideration the buying power of money over

time in light of interest, inflation, and opportunity cost is a
fundamental financial concept known as the time value of
money. Individuals and organizations must have a strong
understanding of this concept in order to make informed
choices regarding saving, spending, and debt repayment.
CAPITAL BUDGETING TECHNIQUES

When determining the profitability of new investment
projects, businesses rely heavily on capital budgeting
procedures. These methods focus on capital expenditure
projects that are expected to provide positive returns and
increase the firm’s worth. Capital budgeting measures include
payback time, net present value (NPV), internal rate of return
(IRR), profitability index (P.I.), and modified IRR (MIRR).
The payback period technique calculates the length of time it
will take to recover your original investment. Businesses want
projects with shorter payback periods to get their money
back as soon as possible. Nevertheless, it does not account
for the time value of money or cash flows after the payback
period.
The NPV approach calculates the value of a project by

discounting its predicted future cash flows to the present,
after which the initial investment is subtracted. It makes
sense to go on with the project if the NPV is favorable. The
project is probably going to be lucrative for the company if
the NPV is high.
37
The internal rate of return (IRR) method is used to calculate
the discount rate at which the original investment is
equivalent to the present value of anticipated future cash
inflows. If the internal rate of return (IRR) supports the
investment, moving through with the project is sensible.
The expected cash stream value divided by initial investment
is the basis for the Profitability Index (P.I.) technique. The
project may be successfully finished if the P.I. is higher than
1. The corporation will earn more from the project if the P.I. is
greater.
The MIRR approach gets over the restriction of the IRR

approach by presuming that cash inflows are invested at
the firm’s cost of capital and cash outflows are financed
at the firm’s borrowing rate. When assessing projects with
unconventional cash flows, this technique is preferred over
the IRR.
Businesses can benefit from capital budgeting approaches

by assessing the profitability of possible investment projects.
Although many options exist, it is important to apply a variety
of approaches in order to make the most accurate choices
possible.
RISK ANALYSIS IN CAPITAL BUDGETING

Capital budgeting’s risk analysis is essential since it includes
weighing the benefits and drawbacks of an investment
against the cost. It’s a crucial process that prevents financial
losses and aids in managerial decision-making. Potential
threats to the project’s success and profitability are identified,
examined, and rated in a process known as risk analysis.
The risk involved in capital budgeting stems from the
unpredictable nature of financial flows. Several unknowns
might affect future cash inflows and outflows. This
emphasizes the need for forecasting to accurately predict
future cash flows. The potential for actual project costs
to exceed projections is still another risk. Market risk,
government oversight, and technical development are all
additional concerns.
38
Methods like sensitivity analysis, scenario analysis, and
simulation analysis are all tools in the risk analysis toolkit.
A sensitivity analysis examines how shifting one factor can
affect a project’s bottom line. Scenario analysis may be used
to assess the many aspects that may have an impact on a
project’s profitability. The main goal of simulation analysis is
to build a model that simulates the project’s behavior under
various scenarios.
The calculation of a project’s net present value using a

discount rate is another basic concept in risk analysis. The
time value of money and the degree of project risk are taken
into consideration when determining the discount rate. If
project risks are significant, the discount rate and net present
value will be low. Inflation may be accounted for in cash
flow forecasts using the discount rate, which includes the
opportunity cost of investing in the project.
39
COST OF CAPITAL
A firm needs a return on capital to attract and retain investors.

It’s the capital expenditure profit rate a firm requires to
maintain or increase its share price. To assess investment
performance, compare the projected return on investment
to the cost of capital. A business’s cost of capital is the total
equity and debt weighted by capital structure. (Corporate
Finance Institute, 2023a)
COMPONENTS OF COST OF CAPITAL

The cost of capital, a key topic in finance, is the entire
cost a firm pays to get financing from various sources. A
corporation must earn it to satisfy investors or creditors.
40
Each of these factors contributes to the total cost of capital:
1. Cost of Debt: Debt instruments like bonds and

debentures cost the company. Bondholder interest,
taxes, and other debt issuance charges are included in
the cost of debt calculation.
2. Cost of Equity: The return owners or investors
anticipate receiving on their initial investment in the
business. The cost of a share of stock is determined
using the CAPM that stands for capital asset pricing
model, which also considers the risk-free rate, market
risk premium, and business beta.
3. Cost of Preferred Stock: The expense the business

experienced while issuing preferred stock, a hybrid
asset that combines the attributes of debt and equity.
The dividend paid to preferred shareholders and any
other costs associated with the issuance of preferred
stock may be included in the cost of preferred stock.
4. Weighted Average Cost of Capital: It represents the

average cost of all the company’s capital sources.
WACC is derived by factoring in each capital source’s
fraction and associated cost.
Knowing the cost of capital is essential for making long-term

financial plans and investment choices. The firm’s cost of
capital is compared to the return on investment prospects.
Whether or not the rate of return exceeds the investment’s
cost of capital determines whether an investment is
profitable. Yet, if the predicted return is less than the cost of
capital, the investment could not be feasible.
41
WEIGHTED AVERAGE COST OF CAPITAL (WACC)
WACC is a financial metric used to determine a company’s
capital cost. The WACC calculation considers the proportion
of equity and debt capital in a company’s capital structure
and the respective costs of each type of capital.
The WACC formula can be written as follows:
The first portion of the formula represents the cost of equity,

while the cost of debt is represented by the second part. The
third part represents the tax savings that result from interest
payments on debt.
The WACC is a critical metric used in capital budgeting

decisions as it is the bare minimum a business may expect
to make in profit on its investments to satisfy its creditors,
investors, and other providers of capital. Companies typically
use the WACC as the discount rate in net present value (NPV)
calculations to evaluate potential investments.
The WACC computation might change based on a firm’s

financial structure and the state of the market. When market
interest rates, credit ratings, and corporation tax rates
fluctuate over time, so may a company’s cost of capital. In
order to guarantee that the WACC calculation appropriately
reflects a company’s cost of capital, it is crucial to periodically
assess and make adjustments. (Hargrave, 2022)
42
FACTORS AFFECTING COST
A business’s cost of capital is the rate of return it must
provide investors to get funds for operations. The cost of
capital depends on a variety of factors, including:
1. Market conditions: Economic growth, interest rates,

and inflation affect capital costs. When the economy is
strong, and interest rates are low, firms may access
cheaper loans.
2. Business risk: Business risk, which includes operational

and sector risk, affects a company’s capital cost.
Businesses with more risk pay more for financing.
3. Financial risk: Financial risk, which is related to a

company’s capital structure and debt levels, affects its
cost of capital. If their debt-to-equity ratio is high,
businesses usually pay more for capital.
4. Capital structure: A firm’s capital cost depends on its

capital structure, which divides debt and equity funding.
As debt increases, so does a company’s cost of capital.
5. Taxes: Taxes also affect capital costs. Businesses may

pay less for capital if they have more debt because
interest payments are tax-deductible.
6. Market perception: The cost of financing may depend

on a company’s reputation and management. Strong
management teams and reputations may help
businesses raise money more cheaper.
Companies must understand capital cost concerns while

investing. Companies may decide whether an investment
opportunity is financially viable and can create a return
greater than the cost of capital by examining the cost
of capital. It helps businesses choose the best financial
structure.
43
CAPITAL STRUCTURE
CONCEPT OF CAPITAL STRUCTURE

The term “capital structure” refers to how a company finances
its daily operations and future growth. A corporation finances
its operations using debt, preferred, and common stock with
long-term investment capital.
Capital structure affects a company’s financial performance

and risk by determining its cost of capital. Factors like
industry norms, tax laws, credit availability, and investor
preferences affect a company’s capital structure.
Debt and equity are the two fundamental elements
of the capital structure. All types of borrowing money
are considered debt, including bank loans, bonds, and
debentures. Common and preferred shares are both
considered to be equity.
The decision between debt and equity impacts the total

risk profile of the organization. Since the corporation must
make set interest and principal payments regardless of the
company’s profitability, debt financing has lower interest
rates but raises the danger of bankruptcy. However, equity
reduces the current shareholders’ ownership and lowers
profits per share. It does not have a set payback timeline.
The risk profile, financial performance, and total cost of
capital of a corporation depend on its capital structure. Debt
and equity should be balanced to boost corporate value and
minimize capital costs. (Sharma, 2023)
44
OPTIMAL CAPITAL STRUCTURE
The ideal capital structure is a company’s debt-equity
combination that maximizes value. The appropriate capital
structure helps organizations to find a balance between
the benefits of borrowing money (such as tax incentives
and increased leverage) and the drawbacks (such as higher
interest payments and a higher likelihood of bankruptcy).
A sophisticated procedure that considers the firm’s risk
profile, cash flow, growth forecasts, industry norms, and
investor preferences determines the appropriate capital
structure. When interest rates are low or cash flows are stable,
companies use debt, but when growth potential is high or in a
risky area, they use equity.
A firm may lower its cost of capital, increase its financial

flexibility, and improve its capacity to seize growth
opportunities with the use of an ideal capital structure. It is
important to understand that the ideal capital structure is
not a set formula and may alter as the company’s financial
status changes over time. As a result, businesses need to
periodically assess and modify their capital structure to make
sure it stays optimum. (Hayes, 2022)
THE THEORIES OF CAPITAL STRUCTURE

Theories of capital structure explain how businesses choose
their ideal capital structure. Understanding these ideas is
crucial for financial managers as it aids in decision-making
about the organization’s financial structure.
1. Modigliani and Miller Theory: This theory holds that

the capital structure of a corporation has no bearing
on its worth. This hypothesis makes no allowances for
taxes, bankruptcies, or ideal capital markets. This
idea holds that a company’s value is based on its cash
flow production, not its debt-equity mix.
45
2. Trade-Off Theory: The trade-off concept states
that a firm’s optimum capital structure balances debt’s
tax benefits with financial stress. According to the
hypothesis, businesses may grow their worth by taking
on more debt up to a point when the costs of financial
trouble balance the tax advantages of debt.
3. Pecking Order Theory: According to this hypothesis,

companies prefer to finance their activities through
internal resources first, then debt, and last equity. In
accordance with this notion, businesses decide on their
capital structure depending on the least costly financing
option they have.
4. Signaling Theory: According to the signaling

hypothesis, a company may communicate with
investors about its future prospects by selecting a
capital structure. Strong growth prospects lead to
stock issuance, whereas bad growth prospects lead to
debt issuance.
5. Agency Theory: This hypothesis states that

shareholder-management dispute affects a company’s
capital structure. Managers may take on more debt than
the firm needs to profit, while shareholders may want
less debt to reduce financial risk.
Financial managers may make well-informed judgments on

the capital structure of the company by being aware of these
theories and accounting for things like taxes, the cost of
bankruptcy, and the possibility of financial difficulty.
46
FINANCIAL LEVERAGE AND LEVERAGE RATIOS
The use of borrowed money or debt to boost potential profits
on equity investments is known as financial leverage. To
boost the return on equity for shareholders entails leveraging
debt to fund a part of a company’s assets. Debt may enhance
profits and losses since the business must still repay the loan
even if earnings decline.
Leverage ratios indicate how much debt a company uses to

finance its operations. Most leverage ratios are D/E and D/TC.
The debt-to-equity ratio compares creditors’ total financing
to shareholders, whereas the debt-to-total capitalization ratio
compares creditors to shareholders.
A corporation with a high D/E ratio may find it challenging

to make its debt payments if earnings decrease, making a
high degree of leverage dangerous. Additionally, if cash is not
being used effectively, a low degree of leverage may mean
that the firm is missing out on prospects for development
and expansion.
Leverage ratios and financial leverage are crucial financial

concepts that aid businesses in choosing how much debt
financing to utilize. Companies must carefully weigh the
advantages and disadvantages of utilizing debt to fund
their operations to find the right leverage that optimizes
shareholder returns while lowering financial risk. (Hayes, 2022)
47
CAPITAL STRUCTURE DECISION-MAKING
An organization’s capital structure determines how it will fund
short- and long-term projects. The capital structure decision
affects the cost of capital and the organization’s risk.
The capital structure depends on the company’s profitability,
growth potential, asset base, and market economy. The
company’s cash flow and risk tolerance determine whether to
use debt or equity financing.
The optimum capital structure is one that minimizes expenses

and increases returns for investors. This is possible only by
carefully balancing debt and equity financing while taking
each one’s cost and risk into account.
Financial leverage, or using debt to support operations, is

another consideration when adopting a capital structure.
Leverage may boost investor profits, but it also raises
company failure risks. Financial leverage and capital structure
stability may be assessed using leverage ratios like debt-to-
equity and debt-to-asset.
48
DIVIDEND POLICY
A company’s dividend policy is its guiding principles and

dividend distribution decisions. The dividend payout
schedule, including payout amounts and methods, is detailed
in the policy. It’s a major choice that affects the company’s
bottom line and can be affected by things like profitability,
cash flow, growth potential, debt, and taxation. (Corporate
Finance Institute, 2023d)
THE IMPORTANCE OF DIVIDEND POLICY

Corporate finance’s dividend policy determines how much of
the company’s profits should be distributed to shareholders
and how much should be reinvested. Investors, market value,
and shareholder wealth depend on a good dividend program.
The consistency and predictability of payouts are one of
the most important aspects of dividend policy. Consistent
payouts increase investor trust and demand for the
company’s stock, which benefits everyone.
Cash flow management requires a dividend policy. A well-

planned dividend policy may help a company manage its
cash flow by anticipating dividend payments. This improves
investment and financial decisions for the firm.
Finally, a company’s dividend policy affects its overall

capital cost. A firm with a predictable dividend policy has a
lower cost of capital than one with an inconsistent payment
strategy. Since a regular dividend policy indicates a well-
managed corporation with a stable cash flow, investors feel
safer and perceive less risk.
49
A company’s dividend policy affects long-term profitability
and financial strategy. A consistent, predictable, and well-
formulated dividend policy may boost shareholder value,
manage cash flows, and minimize the total cost of capital.
FACTORS AFFECTING DIVIDEND POLICY

The dividend policy of a company is influenced by various
factors, including:
1. Earnings: One of the key elements influencing a

company’s dividend policy is the number of profits
it produces. Higher profits translate into greater
retained earnings, which enables the corporation to
increase dividend payments to shareholders.
2. Capital Requirements: The capital requirement of a

company to finance its expansion and growth plans
affects its dividend policy. If the company needs more
capital for expansion, it may not pay higher dividends to
its shareholders as it requires funds for future
investments.
3. Liquidity: A company’s dividend policy is also impacted

by its liquidity condition. Low liquidity may prevent the
firm from increasing dividend payments to shareholders
since it must have cash on hand to pay for ongoing
commitments.
4. Taxation: A company’s dividend policy is influenced

by the tax rates on dividends paid to shareholders. The
corporation can decide to keep profits instead of
increasing dividends if the tax rate on payouts is high.
5. Shareholders’ expectations: Expectations from

shareholders about the company’s dividend policy are
also crucial. The corporation may need to modify its
payout policy if shareholders want bigger dividend
payments.
50
6. Legal constraints: A company’s dividend policy may
also be impacted by legal covenants and other limits on
dividend payment.
7. Industry norms: A company’s dividend policy is also

influenced by industry norms. If the industry is known
for paying high dividends, the company may also follow
the trend to remain competitive.
Management must find a middle ground between the firm’s

capital needs, shareholder expectations, and regulatory and
tax constraints to keep the dividend payout ratio sustainable,
which determines the company’s dividend policy.
THEORIES OF DIVIDEND POLICY

Theories of dividend policy are the different approaches
adopted by companies to determine the amount and timing
of dividends they pay out to their shareholders. There are
three main theories of dividend policy:
1. Dividend irrelevance theory: It implies that a

company’s stock price or worth is unaffected by the
payment of dividends. Per this hypothesis, shareholders
are equally interested in getting a dividend payment and
obtaining the same amount of cash by selling a piece of
their stock.
2. Bird-in-the-hand theory: It indicates that investors

prefer current dividends over capital gains or future
payouts since they don’t know the company’s future.
Therefore, companies with larger dividend distributions
have higher stock values.
3. Tax preference theory: This hypothesis states that

investors prefer dividends over capital gains due to
reduced taxes. Thus, dividend-paying companies have
greater stock values.
51
Companies may embrace one or more of these ideas
depending on their finances, development prospects, and
shareholders. Some corporations choose to preserve money
for expansion, while others prefer to pay dividends. There is
no one-size-fits-all dividend policy.
DIVIDEND POLICY DECISION-MAKING

The management of a business must make an important
choice about dividend policy since it has an impact on both
the value of the company’s shareholders and its financial
situation. Several elements influence the decision-making
process for dividend policy.
The business’s financial health, including its cash flows,

profitability, and investment potential, is one of the most
important variables. A corporation may have a larger dividend
payout ratio if it has significant earnings and adequate
cash to finance its future projects. On the other hand, a
corporation may elect to save more money for future growth
and pay lesser dividends if it has lower profitability and fewer
investment prospects.
Another factor that influences dividend policy is the firm’s

current and future financial needs. If the company requires
funds to expand or reduce debt, it may retain earnings
instead of paying dividends. Additionally, if the company has
high debt levels, it may not pay high dividends to maintain its
debt obligations.
The preferences of the shareholders are also an essential

factor. Some investors prefer a high dividend payout ratio,
while others prefer reinvestment of earnings for future
growth. The management may consider the shareholders’
preferences to maintain a healthy relationship with them.
The nation’s legal and regulatory system also has an impact
on dividend policy. For instance, although some nations
mandate that businesses pay a minimum dividend, others
do not. Furthermore, several tax laws have an impact on the
dividend payout ratio.
52
Making a choice on dividend policy is a complicated
procedure; therefore, management should consider numerous
things. The firm may maintain a positive connection with its
shareholders and ensure financial stability and development
with the aid of a well-crafted dividend policy.
53
RISK MANAGEMENT
Risk management identifies, assesses, and mitigates dangers

to an organization’s operations, finances, and reputation.
Risk management helps firms anticipate and mitigate
expensive dangers. Risk management methods, policies,
and procedures must reflect an organization’s demands. Risk
transfer, avoidance, retention, and reduction may help. Risk
management determines a company’s long-term success.
(Tucci, 2023)
TYPES OF FINANCIAL RISKS

The risk connected to a company’s possible financial loss is
known as financial risk. It contains a range of risks kinds that
may have an impact on a company’s financial performance.
The main types of financial risks are:
• Credit Risk: Exposure to loss because of a

counterparty’s inability to meet its financial
commitments.
54
• Market Risk: The risk of loss due to adverse
movements in market prices such as interest rates,
exchange rates, and stock prices.
• Liquidity Risk: The risk of loss due to an inability to

meet financial obligations when they fall due.
• Operational Risk: The possibility of loss because of

flawed internal procedures, systems, or human factors.
• Reputational Risk: The risk of loss due to damage to

the company’s reputation.
• Strategic Risk: The risk of loss due to the failure of a

company’s strategic decisions or actions.
• Systemic Risk: The risk of loss due to the failure of an

entire financial system or market.
Recognizing and managing these risks helps firms survive.

Effective risk management requires assessing hazards,
planning to reduce them, and regularly monitoring and
reevaluating risk management techniques.
RISK IDENTIFICATION AND MEASUREMENT

Risk identification and measurement are critical to risk
management. These procedures entail evaluating a
company’s possible risks and estimating their probability and
the potential effect on operations and financial performance.
The first stage in evaluating risks is understanding the
company’s business operations and surroundings, including
its industry, rivals, economic circumstances, and regulatory
landscape. Operational, financial, market, strategic, and
reputational risks will be identified.
Next, evaluate the risks and their impact on the company.

Historical data, market trends, and other facts must be
examined to assess a risk’s impact on the company’s
finances.
55
To estimate the possible influence of risks on the company’s
financial performance, quantitative tools like statistical
modeling and simulation may be utilized. The effect of risks
on various scenarios and market circumstances may also be
evaluated through sensitivity analysis and stress testing.
The business may create a risk management strategy
that includes tactics for reducing, shifting, or avoiding
the identified risks after the risks have been recognized
and quantified. The organization should be sufficiently
safeguarded against possible risks by the risk management
strategy, which should also contain monitoring and reporting
tools to measure the efficiency of the risk management
techniques.
RISK MANAGEMENT STRATEGIES

To handle financial concerns, businesses may utilize a variety
of risk management techniques. These techniques may be
generally divided into four groups:
1. Risk avoidance: This strategy involves avoiding

activities or investments associated with high-risk levels.
This may include refraining from investing in certain
financial instruments, industries, or geographic regions.
2. Risk reduction: This strategy involves taking steps to

reduce the likelihood or impact of risks. This may
include hedging strategies, such as purchasing
insurance or entering into derivative contracts to
protect against unfavorable price movements.
3. Risk transfer: This tactic entails shifting the risk

to a different party. For instance, a business may sell
its receivables or engage in credit default swaps to shift
its credit risk to a third party.
4. Risk acceptance: This tactic entails acknowledging the

danger and taking action to lessen its effects. For
instance, a company might accept currency risk and use
foreign exchange risk management to reduce its impact.
56
A risk management strategy depends on the risk, the
company’s risk tolerance, and its finances. To ensure that
risk management techniques continue to successfully
reduce financial risks, it is also crucial to constantly assess
and modify them. Companies may safeguard their financial
resources and guarantee long-term viability by managing
financial risks properly.
THE ROLE OF DERIVATIVES IN RISK MANAGEMENT

A big part of controlling financial risk is using derivatives.
These financial products’ values come from stocks,
bonds, money, and commodities. They let individuals and
organizations hedge against market volatility, limit losses, and
lock in profits. Options, futures, swaps, and forwards are the
derivatives that are utilized for risk management the most
often.
Buying an option allows the buyer to purchase the underlying

asset at the specified strike price and period specified but
not the obligation to do so. You may place a bet on the
direction of prices or utilize them to shield yourself from
market danger.
Futures, like other options, are legally enforceable contracts

to buy or sell a product at a certain price and time. Investors
use them to hedge against the commodity, currency, and
interest rate fluctuations.
A swap refers to the exchange of monetary flows based

on an underlying asset, like interest rates, currencies, or
commodities, between two parties. They may be used
to control cash flows, lower risks, and develop unique
investment plans.
Forward contracts are agreements to purchase or sell at a

specific price and date. They protect against commodity and
currency price fluctuations.
57
In order to control credit risk, a borrower’s default risk,
derivatives may also be employed. Investors may hedge
against losses resulting from borrower default using credit
derivatives like credit default swaps.
Derivatives are essential for managing financial risk and

giving firms and investors the tools they need to shield
themselves from market volatility and unpredictability. They
may also be intricate and dangerous tools; therefore, it’s
important to use effective risk management techniques and
methods to reduce possible losses.
58
MERGERS AND ACQUISITIONS
Financial transactions, including mergers, acquisitions, and

takeovers, integrate two or more businesses or assets.
Mergers integrate two or more companies into one, whereas
acquisitions involve one business buying another. A takeover
is when one corporation buys a controlling position in
another. M&A is commonly used to accomplish strategic
goals, including entering new markets, acquiring critical
technology, broadening product or service offerings, or
attaining economies of scale. (Hayes, 2023a)
TYPES OF MERGERS AND ACQUISITIONS

Companies may combine or acquire each other via M&A. M&A
comes in several forms:
• Horizontal merger: It takes place in an industry when

competing firms create equivalent goods or services.
• Vertical merger: It occurs between two companies that

operate in the same industry but at different stages of
the production process. For example, a manufacturer
may acquire a supplier.
• Conglomerate merger: It occurs between two

companies that are unrelated in terms of their products,
services, and industry.
• Market-extension merger: It involves the merger of

two companies that sell essentially the same products
or services in different markets.
• Product-extension merger: It involves the merger

of two companies that sell different but related
products or services in the same market.
59
• Reverse merger: It occurs when a private company
acquires a public company.
• Asset acquisition: It occurs when one company

buys the assets of another company rather than the
entire business.
• Stock acquisition: It occurs when one company

acquires the stock of another company and becomes
the majority shareholder.
Each M&A strategy has pros and cons, and companies pick
one depending on their strategic goals and industry.
THE M&A PROCESS

There are many steps to the M&A process. Phases of M&A are
as follows:
• Planning and Strategy Development: This is the first

step, which involves identifying the strategic objectives,
goals, and reasons for the merger or acquisition. The
acquiring company should also evaluate the target
company’s strengths, weaknesses, opportunities, and
threats.
• Target Identification: In this step, the acquiring

company identifies and evaluates potential target
companies that fit its strategic objectives and goals.
• Valuation: This step involves evaluating the financial

and non-financial aspects of the target company,
including its assets, liabilities, earnings, cash flow, and
market position, to determine its fair market value.
• Due Diligence: Once a target company has been

identified and valued, the acquiring company conducts
a thorough due diligence process, which involves
reviewing the target company’s financial, legal, and
operational records to ensure that there are no hidden
risks or liabilities.
60
• Negotiation: In this step, the acquiring company
negotiates the terms and conditions of the transaction,
including the price, payment method, and other details
of the deal.
• Documentation: Once the negotiation is complete, the

acquiring company prepares the necessary legal
documents, such as the purchase agreement and other
closing documents.
• Closing and Integration: The final step involves

closing the deal and integrating the target company into
the acquiring company’s operations.
Success in an M&A transaction hinges on meticulous

preparation, smooth execution, and seamless integration.
VALUATION IN MERGERS AND ACQUISITIONS

In mergers and acquisitions (M&A), the target company must
be appraised to establish a reasonable price. A corporate
valuation predicts an organization’s intrinsic value, which
is the discounted value of its expected future cash flows.
Considerations include the company’s financials, past record,
market scenario, and growth prospects.
Various methods of valuation can be used in M&A, including:

• Discounted Cash Flow (DCF) Analysis: The DCF
approach uses a needed rate of return to arrive at a
present value estimate for a company’s cash flows in the
future.
• Comparable Company Analysis (CCA): This analysis

compares the target company with other similar publicly
traded companies in the same industry based on
financial ratios such as price-to-earnings (P/E) ratio and
price-to-sales (P/S) ratio.
• Precedent Transactions Analysis (PTA): This method

compares the target company with similar companies
that have been recently acquired in the same industry
based on the price paid per share and other financial
metrics.
61
• Asset-Based Valuation: This method estimates a
company’s value based on its assets’ value, less its
liabilities and other obligations.
• Economic Value Added (EVA) Analysis: This approach

calculates a firm’s true worth by factoring in how much
profit may be made from investing in the business over
and beyond the cost of doing so.
The valuation approach depends on the target company’s

operation, industry, and data availability. Investor attitude,
market conditions, and parties’ bargaining positions may
impact value.
62
INTERNATIONAL FINANCIAL
MANAGEMENT
International financial management studies how multinational

companies make financial choices. Foreign currency rates,
international trade rules, and foreign economies must be
considered while managing a global company’s finances,
investments, and risks. International finance includes
foreign exchange risk management, capital budgeting,
portfolio management, and taxes. Financial management
helps companies expand globally. International financial
management prioritizes profit maximization and risk
minimization. (Breuer & De Vargas, 2021)
FOREIGN EXCHANGE MARKETS AND RATES

Currency markets and rates are known as foreign exchange
markets. Individuals, corporations, and financial organizations
trade currencies in these marketplaces. Exchange rates show
the relative worth of currencies.
Exchange rates depend on currency supply and demand.

Currency supply and demand depend on economic
development, political stability, inflation, and interest rates.
Exchange rates might be set, adjustable, or both.
Exchange rates include spot, forward, and cross rates. For

deals requiring rapid delivery, currency traders utilize the
“spot rate,” the most current rate. Currency exchange rates
for future delivery are called forward rates. Exchange rates
between two currencies other than the U.S. dollar are called
cross rates.
63
International commerce and investment need foreign
currency markets. They enable firms to swap currencies to
buy products and services and invest abroad. They also let
investors benefit from currency fluctuations.
International traders and investors must understand foreign

currency markets and rates. They can manage currency risks
and conduct smart currency transactions. (Kagan, 2020)
INTERNATIONAL FINANCIAL RISKS

International financial risks include political instability,
currency exchange rates, legal systems, and cultural
differences. Transaction risk and translation risk are the key
international financial hazards.
Transaction risk is the risk of loss from exchange rate

variations between the time a transaction is agreed upon and
completed. It impacts foreign currency enterprises and might
lead to unanticipated expenditures or income loss. Options,
futures, and forward contracts help hedge this risk.
Translation risk occurs when a company’s financial

statements are translated from one currency to another and
exchange rates fluctuate. This risk may damage a company’s
profitability, balance sheet, value, and capacity to recruit
investors. Currency hedging or concentrating on core
businesses helps mitigate this risk.
Other international financial risks include political risk, which

is the danger of loss owing to government policy changes,
war, or civil upheaval, and country risk, which is the risk of
loss due to economic, legal, and political issues in a foreign
country.
Risk assessment and risk management may help

organizations handle international financial risks. These
methods may involve diversifying operations, using financial
tools to hedge risks, and studying the political and economic
environments of other nations where they operate.
64
INTERNATIONAL FINANCIAL STRATEGIES
Multinational firms use international financial methods to
handle cross-border financial operations and risks. These
methods attempt to maximize the firm’s worldwide financial
performance and guarantee that it satisfies its financial
responsibilities while maximizing earnings.
Some of the common international financial strategies
include:
1. Hedging: This entails managing foreign currency and

interest rate risks via the use of financial instruments
such as forwards, futures, options, and swaps.
2. Financing: To finance their activities in many nations,

businesses might combine internal and external sources
of funding. This might include borrowing money from
foreign institutions, utilizing global depositary receipts
(GDRs), or issuing debt or stock in local markets.
3. Cash management: It entails maintaining the

company’s cash holdings in many nations to maximize
liquidity and reduce transaction expenses.
4. Tax planning: Businesses may use tax incentives,

exemptions, and treaties to reduce their international
tax obligations.
5. Capital budgeting: The risk-return tradeoffs and

the availability of financing sources must be taken
into consideration when multinational firms analyze
their investments in various nations. This entails making
adjustments for variations in inflation, interest rates, and
exchange values.
6. Centralization vs. decentralization: Depending on the

advantages of size and control compared to the
necessity for a local response, businesses may
decide whether to centralize or decentralize their
financial management operations across international
borders.
65
Multinational firms may traverse the difficult global business
environment with the aid of efficient international finance
strategies, achieving their financial goals while reducing risks.
66
FINANCIAL MANAGEMENT
CASE STUDIES
Here are a few examples of financial management case

studies:
1. Enron Scandal: One of the well-known case studies

in financial management is the Enron affair. Enron’s
energy business was revealed to have engaged in
accounting fraud by concealing losses and inflating
profits via off-balance sheet activities. As a result, the
business filed for bankruptcy, numerous executives
were imprisoned, and Arthur Andersen’s reputation was
destroyed. (Segal, 2023)
2. Apple Inc.: Apple Inc. is another financial case study.

The organization has met financial management
objectives, including maximizing cash flow, investing
in R&D, and promoting innovation to stay ahead
of rivals. Apple has also entered strategic alliances and
conducted acquisitions to broaden its product range
and grow into new areas. (Zhang, 2018)
3. Coca-Cola Company: Coca-Cola dominates the

beverage business. Its successful financial management
tactics include capital structure optimization, effective
working capital management, and brand awareness
building advertising and marketing. (Carmichael, 2022)
4. Tesla Inc.: The electric automobiles produced by Tesla

Inc. has changed the automotive business. The firm
has also implemented innovative financial management
strategies, such as crowdsourcing for capital raising
and investments in renewable energy sources for cost-
and sustainability-saving initiatives. Tesla’s supremacy in
the electric vehicle business may be attributed in part to
the company’s smart financial management. (White, 2020)
67
5. Boeing Co.: Boeing Co. has struggled financially,
including the grounding of its 737 MAX aircraft due to
safety concerns. Cash flow management, R&D
investment, and capital structure optimization reduce
capital expenses for the firm. The firm’s recent financial
troubles have highlighted the necessity for effective risk
management in financial management.
These case studies highlight how crucial sound financial

management practices are to a business’s success and ability
to weather financial hardships.
68
CONCLUSION
Any organization must have sound financial management,

and accomplishing business goals requires sound financial
management techniques. This book covers financial
forecasting, capital budgeting, cost of capital, capital
structure, dividend policy, risk management, mergers and
acquisitions, international financial management, and financial
forecasting.
A thorough understanding of these principles and procedures

may provide firms with the tools they need to manage
their money and enhance their financial performance.
Organizations must regularly analyze their financial
performance and adjust their financial management plan to
succeed.
Additionally, financial management is a large field with

best practices and trends that are continuously changing
that businesses must follow to remain ahead of the curve.
As a result, companies need to keep informed and consult
financial professionals when needed.
In today’s fast-paced, fiercely competitive business world,
good financial management is essential to a company’s
success, and those that place a strong focus on it are more
likely to achieve their goals and succeed.
69
REFERENCES
Breuer, W., & De Vargas, S. R. (2021, June 29). Some key developments in
international financial management. Journal of Business Economics; Springer
Science+Business Media. https://doi.org/10.1007/s11573-021-01039-8
Budgeting and business planning. (n.d.). https://www.infoentrepreneurs.org/en/
guides/budgeting-and-business-planning/
Carmichael, C. (2022, December 24). Understanding Coca-Cola’s Capital

Structure (K.O.). Investopedia. https://www.investopedia.com/articles/financial-
analysis/090216/understanding-cocacolas-capital-structure-ko.asp
Cepf, T. T. B. (2023, March 13). What Is Activity-Based Costing (ABC)? | Explanation
& Example. Finance Strategist. https://www.financestrategists.com/accounting/
cost-accounting/activity-based-costing/
Chen, J. (2023, March 27). Income Statement: How to Read and Use It.
Investopedia. https://www.investopedia.com/terms/i/incomestatement.asp
Corporate Finance Institute. (2023a, March 13). Cost of Capital. https://
corporatefinanceinstitute.com/resources/valuation/cost-of-capital/
Corporate Finance Institute. (2023b, March 13). Time Value of Money. https://
corporatefinanceinstitute.com/resources/valuation/time-value-of-money/
Corporate Finance Institute. (2023c, March 15). Cash Management. https://

corporatefinanceinstitute.com/resources/capital-markets/cash-management/
Corporate Finance Institute. (2023d, April 3). Dividend Policy. https://

corporatefinanceinstitute.com/resources/equities/dividend-policy/
Elmerraji, J. (2022, June 4). Guide to Financial Ratios. Investopedia. https://www.

investopedia.com/articles/stocks/06/ratios.asp
Fernando, J. (2022, July 6). Balance Sheet: Explanation, Components, and

Examples. Investopedia. https://www.investopedia.com/terms/b/balancesheet.
asp
Ganti, A. (2022, May 27). What Is a Budget? Plus 10 Budgeting Myths Holding You
Back. Investopedia. https://www.investopedia.com/terms/b/budget.asp
70
Hargrave, M. (2022, August 8). Weighted Average Cost of Capital (WACC)
Explained with Formula and Example. Investopedia. https://www.investopedia.
com/terms/w/wacc.asp
Hayes, A. (2022a, April 25). Optimal Capital Structure Definition: Meaning, Factors,
and Limitations. Investopedia. https://www.investopedia.com/terms/o/optimal-
capital-structure.asp
Hayes, A. (2022b, July 11). What Is Financial Leverage, and Why Is It Important?
Investopedia. https://www.investopedia.com/terms/l/leverage.asp
Hayes, A. (2023a, March 25). Mergers and Acquisitions (M&A): Types,

Structures, Valuations. Investopedia. https://www.investopedia.com/terms/m/
mergersandacquisitions.asp
Hayes, A. (2023b, April 5). Cash Flow Statement: How to Read and Understand It.
Investopedia. https://www.investopedia.com/terms/c/cashflowstatement.asp
Indeed Editorial Team. (2023, March 12). What Is the Role of the Finance
Department in Business? Indeed Career Guide. https://sg.indeed.com/career-

advice/career-development/role-of-finance-department
Kagan, J. (2020, October 17). What Is International Finance, and Why Is It So
Important? Investopedia. https://www.investopedia.com/terms/i/international-
finance.asp
Kagan, J. (2022a, March 14). Zero-Based Budgeting: What It Is and How to Use It.
Investopedia. https://www.investopedia.com/terms/z/zbb.asp
Kagan, J. (2022b, June 30). Financial Technology (Fintech): Its Uses and Impact
on Our Lives. Investopedia. https://www.investopedia.com/terms/f/fintech.asp
Kenton, W. (2022a, March 7). Financial Statement Analysis: How It’s Done, by
Statement Type. Investopedia. https://www.investopedia.com/terms/f/financial-
statement-analysis.asp
Kenton, W. (2022b, July 17). Strategic Financial Management: Definition, Benefits,

and Example. Investopedia. https://www.investopedia.com/terms/s/strategic-
financial-management.asp
71
Kenton, W. (2023a, March 7). Activity-Based Costing (ABC): Method and
Advantages Defined with Example. Investopedia. https://www.investopedia.com/
terms/a/abc.asp
Kenton, W. (2023b, March 30). Capital Budgeting: What It Is and Methods

of Analysis. Investopedia. https://www.investopedia.com/terms/c/
capitalbudgeting.asp
Manning, L. (2023, February 15). Financial Plans: Meaning, Purpose, and Key
Components. Investopedia. https://www.investopedia.com/terms/f/financial_
plan.asp
Maverick, J. (2021, September 20). Financial Plan vs. Financial Forecast: What’s the
Difference? Investopedia. https://www.investopedia.com/ask/answers/051315/
whats-difference-between-financial-plan-and-financial-forecast.asp
Pinkasovitch, A. (2022, December 18). Capital Budgeting: What It Is and How It

Works. Investopedia. https://www.investopedia.com/articles/financial-theory/11/
corporate-project-valuation-methods.asp
Segal, T. (2023, April 5). Enron Scandal: The Fall of a Wall Street Darling.
Investopedia. https://www.investopedia.com/updates/enron-scandal-summary/
Sharma, R. (2023, March 6). Capital Structure. WallStreetMojo. https://www.
wallstreetmojo.com/capital-structure/
Strutner, S. (2022, July 5). Financial Management Explained: Scope, Objectives

and Importance. Oracle NetSuite. https://www.netsuite.com/portal/resource/
articles/financial-management/financial-management.shtml
Team, D. C. (2022, December 20). What is Capital Budgeting? Process, Methods,

Formula, Examples. Deskera Blog. https://www.deskera.com/blog/capital-
budgeting/
Team, W. (2022, May 17). Time Value of Money. WallStreetMojo. https://www.

wallstreetmojo.com/time-value-money/
Trinidad, C. (2022, December 4). Target Costing. Corporate Finance Institute.

https://corporatefinanceinstitute.com/resources/accounting/target-costing/
72
Tucci, L. (2023, January 17). What is risk management and why is it important?
Security. https://www.techtarget.com/searchsecurity/definition/What-is-risk-
management-and-why-is-it-important
Tuovila, A. (2022, September 21). Forecasting: What It Is, How It’s Used in
Business and Investing. Investopedia. https://www.investopedia.com/terms/f/
forecasting.asp
Tuovila, A. (2023, March 26). Working Capital Management Explained:

How It Works. Investopedia. https://www.investopedia.com/terms/w/
workingcapitalmanagement.asp
What is Budgeting Software? (n.d.). https://www.oracle.com/ng/performance-

management/planning/zero-based-budgeting/
What is financial forecasting + how to do it [7 Steps]. (n.d.). https://www.paddle.
com/resources/financial-forecasting
White, E. T. N. S. J. (2020, July 22). How Tesla defined a new era for the global
auto industry. U.S. https://www.reuters.com/article/us-autos-tesla-newera-
insight-idCAKCN24N0GB
Zhang, Q. (2018, January 1). Research on Apple Inc’s Current Developing

Conditions. Open Journal of Business and Management; Scientific Research
Publishing. https://doi.org/10.4236/ojbm.2018.61003
73
74
Powered by TCPDF (www.tcpdf.org)

Financial Management EXPLAINED by Business Explained v2

Uploaded by

Copyright:

Available Formats

Financial Management EXPLAINED by Business Explained v2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Management EXPLAINED by Business Explained v2

Uploaded by

Copyright:

Available Formats

1

Licensed to Jerry Sam, [email protected], 11/26/2023

No one is permitted to reproduce or transmit any part of

Copyright © Business Explained (2023)

Licensed to Jerry Sam, [email protected], 11/26/2023

Licensed to Jerry Sam, [email protected], 11/26/2023

Licensed to Jerry Sam, [email protected], 11/26/2023

DEFINING FINANCIAL MANAGEMENT

Financial management is like being the captain of a ship. It

Financial managers must create budgets and control

Financial managers must manage risk by diversifying their

OBJECTIVES OF FINANCIAL MANAGEMENT

1. Maximizing profits: Maximizing profits or shareholder

2. Managing cash flow: Financial management relies on

4. Achieving strategic goals: Achieving an organization’s

5. Ensuring compliance: Finally, financial management

An organization’s financial resources must be managed

The efficient management of financial resources is one

The provision of funding for an organization’s operations and

Ultimately, financing is essential to the organization’s

Financial statements reveal a company’s performance,

THE BALANCE SHEET

Balance sheets are one of three financial statements required

THE INCOME STATEMENT

The cost of products sold is deducted from the company’s

Investors, lenders, and anyone interested in a company’s

Operational, investment, and finance activities comprise the

FINANCIAL RATIOS AND INTERPRETATION

Financial ratios must be interpreted by understanding a

Operating profit margin, return on assets, return on equity,

The gross profit margin is the amount by which sales are

Profitability indicators can inform investors and analysts

The capacity of a business to satisfy its commitments using

Indicators of a company’s financial health and capacity to

Common efficiency ratios include inventory turnover,

Other efficiency ratios include asset turnover and fixed asset

Investors and analysts use efficiency ratios to assess a

The most common leverage ratios are debt-to-equity and

Other leverage ratios include the interest coverage ratio,

MARKET VALUE RATIOS

Market value ratios include dividend yield and earnings

Companies’ financial strategies are their long-term and short-

ZERO-BASED BUDGETING (ZBB)

Costs are decreased, productivity is increased, and

ABC works well in service and high-tech manufacturing,

By drawing attention to processes or procedures that use

In highly competitive markets, target costing helps

Market research is the first step in target costing since it

VBM’s valuation model emphasizes value generation for

Key components of value-based management (VBM) include

Financial modeling helps businesses make educated

A financial model might be as simple as a spreadsheet or

Some methods of boosting profits are perfectly legitimate,

Long-term, companies may suffer from earnings

Selling off assets, spinning off business sections, or reducing

Private equity firms frequently employ LBOs to acquire

The target firm and its stakeholders may benefit or suffer

There are many ways to generate financial synergy, including

Companies engage in mergers and acquisitions (M&A)

Portfolio management’s ends might mean different things